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ESRI Depression
Read more about: Economy 
If you haven’t seen it already, the ESRI released their quarterly analysis with something for everyone. Bad news abounds, nominal 3% drop in wages this year, 16% unemployment next year, GDP decline of 11.6% between 2008 and 2010, a call to focus future budgets on spending cuts. Even a comparison with Zimbabwe.
Dr Alan Barrett also said: “It is possible that people like Zimbabwe have bigger contractions, but you know when you’re in trouble when you’re saying at least we’re not Zimbabwe.
It is not like a game-changer was necessary but if the government was waiting for a nail in the coffin carrying their reputation for economic competence, this is surely it. The single glimmer for the Fianna Fail spin men is that;
It says the budgets will be “strongly redistributive with income gains for those with the lowest incomes and the percentage losses rising with income”.
While those on the lowest incomes will see gains of close to 5 per cent, average losses for the middle and upper income groups range from 2.5 to more than 7 per cent, according to the analysis.
“Shifts of this magnitude take place rarely and usually over a sequence of budgets: the magnitude of these shifts in a single budget has few if any precedents.”
It backs up the point, stressed ad naseum, that those at the top are bearing the brunt. The tough decisions bit will be tested in December when we see whether they go for tax or spending solutions to the ongoing deficit problem.
It expects a general Government deficit of 12 per cent of economic output (gross domestic product or GDP) this year, and 11.5 per cent next year
Elsewhere Jim O Leary questions the value of these short term indicators, insisting that broad policy plans are where the government should focus (a point Colm McCarthy backs up over here). Would that they could.
It doesn’t mean those at the top are bearing the brunt. 7% isn’t that much to someone on 250K+ a year. It’s going for a 5 series BMW instead of the 7 series.
It is the middle earners who will actually bear the brunt. The people who earn a reasonable living but who don’t have that much headroom. Sure you can say they shouldn’t have bought that detached house for 500K when a perfectly good 4 bed semi was going down the road for 250K. Or you can say that the new Ford Mondeo was a waste of money when they had a perfectly good 3 year old Ford Focus. Whatever the reason most of the middle earners are just getting by, have significant debts and don’t have massive savings. They will need to make considerable adjustments to their lifestyle and certainly far more than someone earning 250K a year or someone earning 15K a year.
You can take the cynical Irish view and say good enough for them getting above their station but it is the little extras that the middle class indulged in that drove the economy up and down the chain. The new car every 2-3 years, the weekend away, the grinds for their children, the odd dinner out or Saturday night Indian takeaway, the new golf club, the nice hair-do, sending the kids to the cinema every Sunday, the new bedroom suite, the nice bottle of wine in front of a movie on sky plus. Things that for the last 10 years have distinguished middle earners from low earners. All these will now disappear and make the life of an over taxed middle earner that bit more miserable.
The middle earner is intelligent enough to know when and how to cut back but they will resent the hell out of the fact that their disposable income is not being spent as they wish but instead has gone to bail out fat cat bankers or to maintain social welfare payments. They will ask with some considerable justification what they get for 60-70% of their wages going to the government between the various taxes. They have to pay their mortgage every month while their tax pays for NAMA to take over the bad debts of the millionaire developers. They have to pay private health insurance when their tax pays for free health care for someone on the dole. They have to pay management fees for their housing estate while their tax pays for the council to cut the grass in the local affordable housing estate. They have to pay for grinds for their children to get a decent education while their tax pays for one-on-one special needs classes for the thug who tried to tried to burn down the school last year but was “diagnosed” with ADHD just before his trial. And so on and so on.
But don’t get me wrong. By robbing the disposable income from middle earners the government will actually see a trickle down impact on the lower and higher earners. The lower paid hotel maid, take away chef, golf shop attendant etc will all see their jobs disappear as the higher paid company owner introduces cutbacks as their profits disappear and they have to suffer the indignity of only a 5 series BMW. And finally the highest paid of them all will suffer the ultimate indignity of being voted out of office in a massive middle earner backlash.
Cian,
If Jim O’Leary and Colm McCarthy are right, then the priority policy issues for government remain the same: get the banks sorted, address the public finances crisis and maintain competitiveness in the economy. But as O’Leary points out, it’s very difficult for any government to do this since they cannot be sure if the policies they adopt in good faith will bear fruit even in the longer term, mainly because the international outlook – the progress of the internationally synchronised Grand Recession – remains uncertain and may deteriorate further, rather than recover in late 2010 as all the optimists have been hoping and therefore predicting without much evidence to substantiate their optimism.
So the question remains whether the government has selected the right policy areas to address and if they are assigning appropriate weight to each area in order to position our economy (a) to survive the current downturn and (b)to be positioned to take advantage of improvement in the international situation whenever there are signs of an upturn. And we can argue that one until the cows come home. I think it is fair to say that any government, irrespective of its composition, would be like a blind man in a dark room looking for the lightswitch in the present circumstances.
On the banks issue, I’ve come to the conclusion (reluctantly) that the NAMA proposal is preferable to the alternative of immediate nationalisation of the two main banks. The positive redistributive impact of the recent Budget should also be acknowledged (i.e. protecting the weakest in our society) even by the government’s fiercest critics, but it must also be accepted that there will not be much room to maintain certain social welfare entitlements, such as universal child benefit, in the next Budget or the one after it. That, and third level fees and curtailment of medical cards etc. will make life very difficult for the current government. But any replacement regime would arguably be faced with the exact same lack of options.
Restoring competitiveness is key to maintaining existing jobs, never mind creating new ones and attracting new investment to the country in due course. Equally we need to face the fact that there are no ‘sticking plaster’ solutions to the current rise in unemployment and a lot of schemes proposed by vested interests on either side seem to ignore one simple fact: you can’t maintain jobs if those employed are not engaged in any productive activity. It’s a pointless exercise and the same as throwing good money after bad, money which we can’t afford anyway. Make-work schemes along the lines of the 1980s would be an even more expensive disaster. It’s arguable that there should be far greater emphasis on start-your -own business training opportunities, especially for the young unemployed: we need creative ideas, and people who have the skills, energy and ruthlessness to take a shot at making them work. Unfortunately, the Budget didn’t do much for them. The DET&E, and its plethora of agencies, are wide open to criticism on this front, as too slow, too adminsitratively focused and totally unimaginative, and should be told to come up with with the goods or else. Most of the other economic stimulus ideas and packages that have been proposed – including FG’s laudable proposals – are based on pie in the sky ‘feel good’ ideas that just won’t work, and that’s about the kindest thing that could be said about them.
Meanwhile, there’s that gaping hole in the public finances and the ultimate choice of government – cut public service pay levels and numbers drastically or cut public services. There’s a lot of scope for cutting government costs without interfering too much with basic services or turfing public servants out of their jobs. But the public pay and pensions issue will have to be resolved, sooner rather than later. And that’s going to be very tough too.
So we may be on the right track, but we’re only at the start of it and the train is trundling towards a long dark tunnel with many twists and turns in it before any light will appear at the other end. Saddest of all, as the various branches of the Soprano family bicker and squabble with one another across the floor of Leinster House and on the airwaves, we’re not being offered much in the way of political leadership either.